The Financially Literate Kid: how to use blockchain to teach children about money

An often heard complaint amongst parents and young adults is that our school system is notoriously bad at teaching financial literacy. Many kids are reaching adulthood without having mastered the basics of money management. It is no secret that children are heavily influenced by, and often replicate in adulthood, the money habits of their parents. If you grew up witnessing your parents constantly grappling with credit card debts, car loans, and student loans, you are likely to think that this is just how life goes and follow in their footsteps.

Now you don’t need a massive bank balance or even a high paying job to live a happy life, but as you already know if you’re reading this, good money habits can go a long way. I want my children to have a sound financial education and build good money habits as they grow up. And since I am also interested in the Blockchain Technology and DeFi (Decentralized Finance), I decided to build a blockchain project to teach my children about money.

Because anyone can create digital currencies on the blockchain, I created my own called the $hen (SHN) on the Ethereum network. 1 SHN is redeemable for $1 NZD (Important note: it is only redeemable by my children. There is no value if anyone else got hold of it!).

When the kids turn 5, I will give them $10 each month as pocket money. And that is the only allowance they will be getting. They can choose to spend it, save it in a piggy bank, or “invest” it in SHN. They can earn 10% interests compounded monthly for any SHN they invest. Here is Lesson Number One:

Compound Interest

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”. — Albert Einstein

While this may or may not be a genuine Einstein quote, the power of compound interest is undeniable. If the kids want to use their money to buy a $200 remote control car, they can start saving their $10 monthly allowance. It will take them 20 months to come up with the money. But if they invest it in SHN with 10% monthly compound interests, they can do it in less than a year:

I set up a FME workflow to automate this process, calculate interests and transfer SHN from my account to my Kids digital wallets. Because the transactions are permanent records on the blockchain, it is easily traceable and can’t be changed or deleted.

First, I use HTTPCaller to get the SHN balance on my kids digital wallet (Check out this post on how to connect to Ethereum using FME). Then use AttributeManager to calculate the amount to transfer for the month:

transfer amount = wallet balance x 0.1 + 10

To send transactions, I created a Node Application. There are a few steps involved to sign a new transaction. Check out the Ethereum API for more information. Once the new transfer amount is calculated, I use another HTTPCaller to call my Node App and create a transaction on the blockchain.

When my children turn ten, I am planning on stopping the $10 monthly allowance. Firstly, I don’t want them to build a sense of entitlement. At ten, they will be old enough to start earning their pocket money by taking over some household chores, selling items online, or coming up with creative entrepreneurial projects. Secondly, if they turn out to be financially disciplined beyond my wildest dreams and invest every cent in SHN, the compound interest could potentially bankrupt Dad! Even if they were to invest just $1 each month, they would still have over $3000 when they turn 10. By then, they will also have discovered another important money lesson:

Passive Income

Passive Income is your money making money while you are asleep. If they can accumulate 3k by the time they are 10, that 3k is going to produce $300 interests a month. That’s 30 times the allowance they used to get. Once their investments start producing income, they don’t need to rely on parents for handouts.

By then, I will also have to adjust my generous compounding rule. Otherwise I might end up owing them millions. Just like Einstein said “he who doesn’t understand it, pays it”.

My oldest daughter is turning five this month. What will her financial journey look like? Will she…

• Spend $10 each month on ice cream and those awful LOL Suprise toys, and still have $0 when she turns 10?

or

• Invest her pocket money in SHN, have the ability to redeem a few hundred dollars each year to buy something she really wants, and still build up enough passive income when the allowance stops?

Now, as anyone who’s had one, or was one themselves can attest, most five year olds are prone to occasional lapses in judgment. They are still working on the impulse control part of their brain. Their financial decisions may occasionally be less than optimal, and that’s ok. You are showing them there is an alternative, and as they mature, they will start to identify patterns and ways they can work towards their financial goal.

Of course, I want my kids to know that money is earned through hard work, and hard work that brings you satisfaction is its own reward. But they also shouldn’t be a slave to their job. I want to teach them that there are ways to build up a passive income to replace their earned income. Once their passive income can cover their expenses, they are financially free. And financial freedom brings unlimited permission to do the things they enjoy and value. Money doesn’t bring happiness… we all agree on that. But what if a joyful life free of any financial woes was the highest dividend a $10 monthly allowance could bring?

by Enric Shen with Agnes Peyron